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New regulations make it easier for charities to have removed restrictions on particular funds which have become inappropriate

The regulations extend the scope of the reorganisation rules under the Charities and Trustee Investment (Scotland) Act 2005 and make it possible for charities to apply to OSCR to reorganise “restricted funds”. This could enable the rejuvenation of restricted funds which are inactive, or assist in situations where the purposes of the funds are no longer suitable or cannot effectively be used.

Restricted funds (in terms of the 2005 Act meaning “property (including money) given to a charity for a specific purpose and in respect of which conditions have been imposed as to its use”) can in many cases be affected by the passage of time, the development of the charity, or changes in society. Often historic factors would now be viewed as inappropriate bases for a restriction or condition. In many cases the outdated nature of the restriction means the funds cannot be used effectively, efficiently or even at all.

Until the introduction of the regulations, restricted funds could not be reorganised by charities where they had been given to the charity for a specific purpose and had to be accounted for separately.

Passing the test

The new opportunities afforded by the regulations do not however give charity trustees carte blanche to disregard restrictions. Restrictions in many cases will be quite proper (irrespective of age of the condition), ensure the donor’s legitimate wishes are carried out, and encourage the charity to be accountable.

There are tests and conditions contained in reg 4, which must be satisfied by the charity before any application for reorganisation (restricted funds or not) will be successful. Regulation 4 provides that the application to reorganise restricted funds under s 43A of the 2005 Act must include the following:

specific details of the historic conditions imposed on the use of the restricted funds, either by evidence of the original document or a statement setting out the purpose of the funds that were given to the charity and the restrictions imposed;

details of the proposed reorganisation of the restricted funds;

a statement from the charity showing why it considers that the conditions of s 43A(2) of the Act have been satisfied (the “reorganisation conditions” applicable to all cases);

a statement from the charity setting out the reasons why the reorganisation will allow the restricted funds to be used more effectively for charitable purposes in line with its constitution;

a statement that the charity has been unable to ascertain the wishes of the donor, with an explanation of attempts to ascertain those wishes.

Route to modernisation

The introduction of the regulations represents a positive step forward for charities and creates appropriate flexibility in dealing with restricted funds. Restrictions that still have a role to play will remain, but charities will now have the opportunity to articulate a reason why the restrictions have become outmoded and should be removed or varied. Taken with other updates to the reorganisation provisions previously brought in by the Public Services Reform (Scotland) Act 2010, to allow reorganisation applications which seek to make positive changes to a charity’s constitution (as opposed to addressing “problems” within the constitution), the regulations offer charities a suite of opportunities to modernise and rejuvenate their constitution and scope of activities.

While the legislation underpinning the reorganisation provisions is itself in need of review and redrafting (see “Acts of Kindness”, Journal, July 2010, 46 for a discussion of a few issues), the concept of reorganisation and the manner in which OSCR deals with these cases has resulted in tens of millions in charitable funds being unlocked.